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If only people could lose weight like electronics. Every year, smartphones, tablets, and laptops drop bulk while adding function. The weight-loss program owes much of its success to flash-based memory chips, which enable faster storage in an ever-shrinking package.

Flash drives are 100 times faster than hard drives, and they put a lot less strain on battery life.
SanDisk (disk)

Still, NAND prices have been tumbling for the past decade, sometimes by as much as 60% in a year. SanDisk succeeds by removing costs at an even greater rate. But an unusual thing happened in the fourth quarter; the price for SanDisk's NAND actually rose by 7% from the prior three months. The higher price boosted profits; per-share earnings for the quarter were $1.05, which was 30 cents higher than Wall Street predicted.

The favorable pricing isn't a fluke, according to analysts and industry observers, who say SanDisk and its three main flash rivals have suddenly taken a more rational approach to the market, slowing production growth after oversupply slammed prices last year. "In 2013, my expectations are for the industry to increase its supply at the slowest pace in its history," says Sumit Sadana, SanDisk's executive vice president and chief strategy officer.

At the same time, mobile devices and lightweight laptops are driving new demand for flash. To top it off, SanDisk could still cut costs by some 20% this year.

Wall Street hasn't given SanDisk enough credit for the improving backdrop. The stock could easily rise 20% in the next 12 months, from a recent $50.

Analysts expect SanDisk's earnings to jump 49% this year to $3.55 a share, or $874 million, on revenue of $5.6 billion.

Two weeks ago, Rajvindra Gill, an analyst for Needham, upgraded the stock to Buy from Hold. He has a price target of $60 but sees the possibility of a $65-to-$70 stock. He points out that gross margins were 40% in the fourth quarter, compared with an expected 33%. "We expect margins to improve throughout the year. And when you flow that through the model, you get a tremendous amount of earnings." In a bullish scenario, EPS could reach $5 next year, Gill says, nearly a dollar above the current consensus.

At 11 times the bullish estimate—plus about $15 in net cash per share—SanDisk could be worth $70. Over the past 10 years, SanDisk has traded between 8 and 36 times year-ahead estimates, according to FactSet.

SanDisk's pure-play status is becoming an advantage. Apple has historically bought components from Samsung, but that seems to be winding down as the companies contend for smartphone dominance. "It is kind of strange to be buying so much product from a company that you're suing," says Dee Robinson, an analyst at IHS iSuppli. Apple is "trying to create a more diverse supply chain so that they're aren't so reliant on Samsung."

The Bottom Line

SanDisk's gross profit margins rose nine percentage points, to 40%, in the fourth quarter, and could continue to grow in 2013. As profits rise, the stock could move up 25% or more.

When the iPhone 5 launched in September, it was the first time Apple had incorporated a SanDisk design in its phones. Apple is now SanDisk's biggest customer, at 13% of revenue. SanDisk also supplies chips to Samsung.

Milpitas, Calif.–based SanDisk was originally known for selling removable memory cards directly to consumers. But the surge in mobile computing has made its technology far more useful. About two-thirds of the company's revenue is now derived from handset and PC makers that embed SanDisk components inside their products.

The surge in flash is not just about reduced bulk. It allows smartphones, tablets, and PCs to power on instantly, instead of waiting for a spinning hard drive to find data. So-called solid-state drives, the type of flash used in PCs and enterprise servers, are roughly 100 times faster than traditional hard drives, and they use less energy. The same attributes are becoming attractive to enterprise data centers, as well.

SanDisk expects solid-state drives to be 25% of revenue in 2014. Two years ago, the category was just a blip on the company's radar.

SanDisk's various growth opportunities and its wide base of customers should offset any slowdown in high-end smartphones—the current fear among tech investors. Two weeks ago, on the same day Apple shares tumbled 12%, SanDisk was up 3%. There's more good news to come.